Q4 2017 Rocky Mountain Chocolate Factory Inc Earnings Call
May 22, 2017 AM EDT
RMCF - Rocky Mountain Chocolate Factory Inc
Q4 2017 Rocky Mountain Chocolate Factory Inc Earnings Call
May 22, 2017 / 08:15PM GMT
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Corporate Participants
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* Bryan J. Merryman
Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director
* Franklin E. Crail
Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman, CEO and President
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Conference Call Participants
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* David Luebke
* Vincent Rudisill
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Presentation
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Operator [1]
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Hello, and welcome to the Rocky Mountain Chocolate Factory Fourth Quarter and Fiscal Year-End 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.
Some of the statements made during this call may be considered forward-looking statements that involve a number of risks and uncertainties. There are several factors that could cause actual results of Rocky Mountain Chocolate Factory to differ materially from these forward-looking statements. These factors include, but are not limited to, the potential need for additional financing; the availability of suitable locations for new stores; the availability of qualified franchisers to support new stores; and customer acceptance of new products; dependence upon major customers; economic and consumer spending trends and such other factors listed from time to time in public announcements and in Rocky Mountain Chocolate Factory's SEC reports.
In addition, please be advised that the financial results for the fiscal periods presented in this call do not necessarily indicate the results that may be expected for any future quarters or the upcoming fiscal year. To Rocky Mountain Chocolate Factory's knowledge, the information relayed in this conference call is correct as of the date of its transmission, and the company does not undertake any obligation to update this information in the future.
I would now like to turn the conference over to Franklin Crail, CEO. Mr. Crail?
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Franklin E. Crail, Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman, CEO and President [2]
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Thank you, operator. Good afternoon, everyone, and welcome to Rocky Mountain Chocolate Factory's Fourth Quarter and Fiscal 2017 Year-End Conference Call. I'm Frank Crail, President of Rocky Mountain Chocolate Factory. And with me here today is Mr. Bryan Merryman, the company's Chief Operating Officer.
We're going to start the call this afternoon with Bryan giving you a summary of both the fourth quarter and fiscal 2017 year-end operating results. And at the conclusion of his presentation, we'll be happy to answer any questions that you may have.
So at this time, I'd like to turn the call over to Bryan.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [3]
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Thanks, Frank. I would also like to welcome everyone to today's call, and I'll start with the fiscal year. Total revenues decreased 5.3% this year versus last year. Factory revenues decreased 3.5% due primarily to a 5.6% decrease in shipments to customers outside of our network of franchised stores and, to a lesser extent, a 4.7% decrease in same-store pounds purchased by our franchisees and licensees and a decline of 3% in the average number of domestic Rocky Mountain Chocolate Factory franchised stores in operation.
Retail sales were down 11%. This was due to the sale of a certain company-owned location and the closure of an underperforming company-owned location. Same-store sales at all company-owned stores and cafés increased 0.5%.
Royalty and marketing fees were down 5.3%. This was a 12.3% decrease in franchised units. Same-store sales at Rocky Mountain Chocolate Factory franchised stores increased 0.9%, while same-store sales at domestic U-Swirl franchised cafés declined 3%. Total same-store domestic franchise sales across all brands decreased 0.2%. Franchise fees decreased 40.8%. We had international license fees in the prior year of $263,000, with only $9,000 in the current year.
Factory margins decreased 270 basis points. This was due to maintenance, equipment issues, increased cost of labor and overhead, and it was slightly offset by a decrease in certain commodities.
Excluding retail expenses, operating expenses decreased 8.9% on lower G&A expense and lower franchise costs.
Adjusted EBITDA was $7,459,000 versus $8,223,000 last year. Net income for the year was $3,450,000 compared to $4,426,000 last year.
Diluted earnings per share for the year was $0.58 compared to $0.73 in the prior year. During the year, we opened 40 stores, 8 Cold Stone-Rocky Mountain Chocolate Factory co-branded stores, 4 domestic Rocky Mountain Chocolate Factory stand-alone stores, 2 -- 22 international locations and 5 domestic U-Swirl locations and 1 international U-Swirl location.
We finished the quarter with $5.8 million in cash, a current ratio of 1.9:1. During the year, we repurchased 35,000 shares of our common stock at an average price of approximately $10. And on March 10, 2017, the company paid its 55th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share.
During the first quarter, we acquired certain assets of 2 small confectionery companies, FernCreek Confections and Elaine's Toffee Company. These acquisitions allowed us to acquire an all-natural gluten-free line of products and a high-end toffee line and also expanding our customer relationships.
On the quarter, total revenues decreased 5.9%. Factory revenues were down 6.3% primarily due to 11.3% decrease in same-store pounds purchased by our franchisee and licensees, partially offset by a 2.7% increase in shipments to customers outside our network of franchised and licensed stores.
Retail sales decreased 9.2%. Again, this was the result of a closing of the underperforming company location and the sale of certain company-owned locations. Same-store sales at all company-owned stores and cafés decreased 4% in the fourth quarter.
Royalty and marketing fees decreased 1.6% in the fourth quarter. This was due to a 14.4% decrease in domestic franchised units. Same-store sales at Rocky Mountain Chocolate Factory franchised stores decreased 3.9%, while same-store sales at domestic U-Swirl franchised cafés declined 7.6%.
Total same-store domestic franchise sales across all brands were down 4.6% in the quarter. Franchise fees decreased 20%. Fewer domestic U-Swirl locations opened this year versus last year. Factory margins were down 920 basis points, again on increased labor and overhead costs related to maintenance and equipment issues and a product mix shift, partially offset by a decrease in the cost of certain commodities.
Excluding retail operating expenses, operating expenses decreased 9.9% in the quarter on lower G&A and franchise costs. Adjusted EBITDA was $1,636,000 versus $2,183,000 last year in the fourth quarter. Net income was $732,000 this year versus $2,422,000 last year. In the fourth quarter last year, a very large tax benefit was recorded, and that's why there is such a dramatic swing in net income. Diluted earnings per share was $0.12 in the quarter compared to $0.41 in the prior year.
During the quarter, we opened 8 stores, 2 Cold Stone Creamery co-branded stores, 4 international Rocky Mountain locations and 2 domestic Rocky Mountain locations. We finished the quarter with $5.8 million in cash, current ratio of 1.9:1. And we -- again, we paid our 55th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share.
And with that, I'll turn it back over to Frank.
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Franklin E. Crail, Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman, CEO and President [4]
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Thanks, Bryan. Okay, operator, at this time, we'd be happy to answer any questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And our first question comes from [Bryan London], a private investor.
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Unidentified Participant, [2]
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Yes. I asked a couple of conference calls ago, and I just wanted to follow up and see if you have any more color on selling candy bars or the tote bags to the grocery stores.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [3]
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Our sales to the -- our wholesale sales to larger retail chains were down significantly this year over last year. I think we actually performed pretty well, but we weren't able to keep a lot of the shelf space that was allocated to us, and it was never a really large number in terms of revenues. But that business is down, and I can tell you, in the future, we'll be really trying a more regional approach as opposed to a national approach with chains like Target. I think that we'll more look to retail on more regional players to move our product and continue to grow with our existing partners outside of our stores.
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Unidentified Participant, [4]
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Okay. Yes, I had -- I live in California. And I noticed the tote bag from Target for a little while. And I know this is a little anecdotal, I noticed Ghirardelli and Lindt with similar-sized tote bags were selling for $3 or $4 each, and Rocky Mountain Chocolate Factory ones were selling for $6 each. And I was wondering if you guys have any kind of leverage or control over the price or maybe if you guys are having -- are you faced with slotting fees with -- when you go to the grocery stores? Just kind of curious about any kind of feedback in terms of that.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [5]
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Well, we don't. I mean, we certainly don't have any pricing power. I mean, those kind of retailers dictate prices. Our cost structure and our product quality is such that we're not going to compete with Lindt and Ghirardelli and the other big players that have the lion's share of shelf space. I think there's the opportunity to get rotated in and be in for a period of time, and then you get replaced with another specialty chocolatier. And so you can be in and out of these retailers. But to get a permanent shelf space allocation, as you'd say, requires slotting fees. We don't do that, and we just don't have the cost structure to compete on price.
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Operator [6]
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Our next question comes from David Luebke of Summit Brokerage.
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David Luebke, [7]
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My question, you had the machinery maintenance and equipment issues in the fourth quarter. Would that be a onetime event or not?
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [8]
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Well, actually, it -- we had issues in our factory around maintenance and equipment. And in the first quarter, we were way down with sales to a particular large customer, and those problems really plagued us all year. It was the worst in the fourth quarter. We made the decision that we were going to get the product out and we were going to get it to our customers no matter what. So we spent way more on labor and overhead than we typically do. We've seen a nice improvement in March and April, do not expect those fourth quarter trends to continue into next year and would expect pretty good margin improvement next year over this year. We've worked, I wouldn't say through all of the issues but most of them. And we'll be investing heavily in maintenance and equipment this year as well. And so I don't foresee any of the kind of large issues that we have this year. I think we'll have another year of investment, and the factory will, I think, be in tiptop shape by the end of this next fiscal year, and we've already seen an improvement.
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David Luebke, [9]
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Okay. And as far as other expenses, costs, I see where dairy farmers can hardly give away milk, and the price of cocoa was -- has dropped a lot, too. Is that affecting your cost structure yet or is that going to take a while?
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [10]
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Well, I mean, it has helped. Unfortunately, we have other costs that are growing, and that has certainly helped us. Unfortunately, cocoa butter hasn't come down to the extent like the cocoa contract has and sugar and some nuts. So we're definitely benefiting from lower commodity costs, and we should see -- again, we shouldn't have the recurring issues that we have this last fiscal year. We'll see margin improvements from that, and we should also see some margin improvement from commodities as well. It's not going to be huge, but I do expect that we'll have incrementally better margins than we did in fiscal 2016.
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David Luebke, [11]
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Okay. I have one more question, but I can wait.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [12]
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No, you go ahead. You don't have to get back in queue.
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David Luebke, [13]
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Well, any outlook on the dividend increase, decrease, stay the same?
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [14]
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I think that if the company executes, it can grow this fiscal year. Again, I think we're off to a good start and put a couple of well-executed quarters behind it. I think we would be in a position to consider a dividend increase, but I think we're going to have to see execution in our business for a few more quarters before we do.
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Operator [15]
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(Operator Instructions) Our next question comes from Vincent Rudisill, a private investor.
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Vincent Rudisill, [16]
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My question is looking longer term. The company's kind of been plodding along for a number of years now. You just spoke about the dividend, and most quarters, you're covering the dividend as presumably that's going to be maintained and possibly increased, as you mentioned. But other than paying dividends and occasionally repurchasing stock, what's the long-term vision for the company? I guess stated another way, if we were to look back 5 years from now, what in particular should we as shareholders look to, to measure whether or not the goals for the company were achieved?
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [17]
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I think longer term, we need to open more domestic Rocky Mountain Chocolate Factory franchised stores, and we've been evaluating a number of ways to help that happen. And I think that's critical to our future. Over the last 5 years, we have not been opening as much domestically as we would like. We have had some international success, some ups and down, but had some success growing there. And so I think we need to accelerate our domestic franchise openings for sure. We need to continue to grow our sales outside of our system. This year was definitely a setback, and for the first time in a number of years, specialty market sales, as we term them, are down this year over last year. It's the first time that that's happened in the last 5 years. We would expect going forward that we would see year-over-year increases there. We'd like to see, just like I said, an acceleration in domestic franchise openings, continued international growth. But we definitely need to get the company's top line going, and we're doing everything we can to try to make that happen.
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Vincent Rudisill, [18]
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Okay. And I mean, are there any metrics that you're using to have long-term goals that are possibly related to compensation, bonuses and so forth? Do you use metrics of any sort other than just indicating you'd like to open more franchised stores? Again, I'm kind of trying to understand where you want to take the company longer term.
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Bryan J. Merryman, Rocky Mountain Chocolate Factory, Inc. - CFO, COO, Treasurer and Director [19]
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Well, we don't -- I mean, what we've disclosed is what we disclose. We don't disclose anything else than what we have disclosed in our filings. And those are -- you can find metrics on the company in our filings. But of course, we'd like to grow our same-store sales. That's important to us. We'd like to see unit growth. We don't talk about it super specifically. We don't do -- we don't give guidance. And so I'm not sure I can give you the detail that you're looking for in terms of what we disclose and what we're willing to disclose. But we would like to see the company expand internationally, would like to see it expand domestically. And we'd like to continue to grow our sales profitably outside of our system. We'd like to see rockymountainchocolatefactory.com play a larger role in sales going forward. Our franchise system had rmcf.com really until this last year. It was our first year with it. We saw large increases in sales there. We'd like to continue to grow that and see it grow rapidly at least in terms of percentages. And so that's as specific as I can get for you, and that's my answer.
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Operator [20]
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We show no further questions at this time. I would like to turn the conference back over to Mr. Crail for any closing remarks.
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Franklin E. Crail, Rocky Mountain Chocolate Factory, Inc. - Co-Founder, Chairman, CEO and President [21]
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Right. Thank you, operator. Thank you, everyone, for listening to our conference call this afternoon, and we look forward to talking to you at the end of our first quarter. Have a nice day. We'll be talking with you soon. Thank you.
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Operator [22]
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To access the digital replay of this conference, you may dial 1 (877) 344-7529 or 1 (412) 317-0088, beginning at approximately 6:15 p.m. Eastern time today. You will be prompted to enter a conference number, which will be 10107782. Please record your name and company when joining.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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